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Monday, 7 August 2017

(The Edge Financial Daily) Purchase of Sunway Clio a positive for Sunway REIT

Sunway Real Estate Investment Trust (Aug
4, RM1.71)

Maintain hold recommendation with an
unchanged target price of RM1.70:

Sunway Real Estate Investment Trust
(Sunway REIT) has entered into sale and purchase agreements for the acquisition
of Sunway Clio property for a total purchase consideration of RM340 million
(subjected to valuation adjustment) from Sunway
Bhd.

The proposed acquisition of the
property is expected to be completed by the fourth quarter of 2017.

We are positive on the news as the
vendor will provide a guaranteed rental income of RM20.23 million for a period
of four years post acquisition, which translates into a net yield of about
5.95% vis-à-vis its current yield of about 5.3%. Sunway Clio Hotel is new (1.5
years) and needs time to be mature. Moreover, any additional income on top of
the guaranteed income will be retained by Sunway REIT, further enhancing the attractiveness
of the acquisition.

After the expiry of the guaranteed
rental period, rental contribution from the property will be based on the
minimum rent (about RM8.23 million) or variable rent (20% gross operating revenue
plus 70% net operating profit), whichever is higher.

In addition, the acquisition will
provide long-term income contribution as the hotel lease has 10 years’ tenure
with a renewal option for another 10 years.

Going forward, we believe the performance
of the hotel will improve as the hotel matures and benefits from operating synergies with
Sunway REIT’s other properties located within Sunway City.

The acquisition will be fully funded
by existing debt facilities, and its net gearing ratio will increase from 34.7%
to 37.9%.

Based on our estimates, the acquisition
is expected to increase our financial year 2018 earnings per unit and distribution
per unit forecasts by about 2%. — Hong Leong Investment Bank Research, Aug 4